Citigroup logo. [Source: Citigroup]The latest government bailout gives Citigroup bond holders excellent terms and doesn’t provide the bank with new money. Instead, Citigroup cut expenses with the elimination of preferred stock dividends, and also converted shares into common equity at an above-market-value of $3.25, positioning itself to take the first hit if it encounters additional losses. Analysts are predicting that the company’s losses will continue to increase. Since the beginning of 2009, Citigroup’s stock has fallen 78 percent. “Debt holders could eventually be required to participate in further government-led restructuring actions,” Standard and Poor’s says. [Bloomberg, 3/2/2009] Citigroup CEO Vikram Pandit tells investors that increasing the bank’s “tangible” common equity from $29.7 billion to as much as $81 billion should “take confidence issues off the table,” about the bank’s loss absorption ability. The bank lost $27.7 billion in 2008, and is predicted to lose $1.24 billion during the first six months of 2009. “There’s no difference here,” says Christopher Whalen, co-founder of Institutional Risk Analytics, a Torrance, California risk-advisory firm. “It won’t fix revenue, and you’re still going to see loss rates.” Whalen says that the government’s efforts are mainly protecting other financial institutions and foreign goverments that are Citigroup bonds holders. “The taxpayer is funding the operating loss and protecting the bondholders,” Whalen notes. “The subsidy for the banks will become one of the biggest lines in Washington’s budget.” Government Should Organize Citigroup, AIG Bondholders - Whalen also says it would be better if the government organized Citigroup and insurer American International Group Inc. bondholders, since the insurer received a $150 billion US bailout, and also made a deal with the government to convert some of its debt to equity. US government investment fell by more than 50 percent, and the government plans to convert up to $25 billion of its preferred stock to common shares, gaining a 36 percent stake in the bank. At Friday’s closing price of $1.50, government investment is worth approximately $11.5 billion. The bank itself has a stock market value of $8.2 billion as of market closing on February 27. Analyst: Investors Should Avoid Citigroup Shares - Richard Ramsden, head of a group of analysts at Goldman Sachs Group, recommends that investors avoid investing in Citigroup shares: “It is unclear whether this is the last round of capital restructuring, which means that existing equity may be further diluted in the future.” The bank’s move to convert preferred shares to common equity led Moody’s Investors Service to adjust its senior debt rating for the bank from A3 to A2. Standard and Poor’s also changed its outlook on the bank’s debt from negative to stable. “Citi will face a tough credit cycle in the next two years, which will likely result in weak and volatile earnings,” S&P analyst Scott Sprinzen says. “We cannot rule out the possibility that further government support may prove necessary.” With the first two Citigroup rescue bailouts, the US Treasury bought $45 billion of preferred stock, and the Federal Reserve and FDIC guaranteed the bank against all but $29 billion of losses on a $301 billion portfolio of assets. With the third bailout, the Treasury, the Government of Singapore Investment Corporation, Saudi Prince Alwaleed bin Talal, and other preferred stockholders, agreed to take common stock at $3.25 a share, giving up dividends. The chairman of the House Ways and Means Committee, Charles Rangel (D-NY), says: “The administration and the past administration have tried so many different ways that we can only hope and pray that this time they get it right. It seems like with the banks it is a never-ending thing.” [Bloomberg, 2/28/2009]Third US Rescue Forces Citigroup Board Changes - The Obama administration demonstrated its willingness to force changes on executives at top banks that receive taxpayer-funded rescue packages by pressing Citigroup to reorganize its 15-member board with new, more independent members. The move sends a message to Wall Street that there are consequences when taxpayer dollars are used to save them. “The government is the new boss, and the new executive committee is no longer on Park Avenue,” says Michael Holland who, as chairman and founder of New York’s Holland & Co., manages nearly $4 billion in investments. [Bloomberg, 3/2/2009]

Regulatory reports on Bank of America, Citibank, HSBC Bank USA, JP Morgan Chase, and Wells Fargo indicate that, as loan defaults of every kind soar, the institutions face “catastrophic losses” should economic conditions “substantially worsen.” Already suffering as a result of what the banks term “exotic investments,” the reports disclose that, as of December 31, 2008, current net loss risks from derivatives—quasi-insurance bets tied to loans or other underlying assets—have swelled to $587 billion. According to McClatchy journalists Greg Gordon and Kevin G. Hall, obscured in the year-end regulatory reports that they reviewed were figures reflecting a jump of 49 percent net loss in just 90 days. Bailout Money Shoring Up Reserves - Taxpayer bailout money has already shored up four of the five banks’ reserves, with Citibank receiving $50 billion and Bank of America $45 billion, in addition to a $100 billion loan guarantee. According to their quarterly financial reports as of December 31: JP Morgan had potential current derivatives losses of $241.2 billion, overrunning its $144 billion in reserves, and future exposure of $299 billion. Citibank had potential current losses of $140.3 billion, outstripping its $108 billion in reserves, and future losses of $161.2 billion. Bank of America reported $80.4 billion in current exposure, lower than its $122.4 billion reserve, but $218 billion in total exposure. HSBC Bank USA had current potential losses of $62 billion, over three times its reserves, and potential total exposure of $95 billion. San Francisco-based Wells Fargo, which took over Charlotte, N.C.-based Wachovia in October 2008, reported current potential losses totaling almost $64 billion, below the banks’ combined reserves of $104 billion, but total future risks of about $109 billion. [McClatchy Newspapers, 3/9/2009; Idaho Statesman.com, 3/9/2009]

Wells Fargo, the second largest home lender in the US, posts a surprising record first-quarter profit, outperforming the most hopeful estimates on Wall Street. The bank’s earnings are the most since July 16, 2007, with shares down 33 percent in 2009. The report also states that Wachovia Corporation, acquired by Wells Fargo in October 2008, is exceeding expectations. According to data compiled by Bloomberg, Wachovia’s $101.9 billion in losses and writedowns are the most for any US lender, and its adjustable-rate home loans are considered among the industry’s riskiest. Yet, in its preliminary report, Wells Fargo states that acquiring Wachovia “has proven to be everything we thought it would be.” Official first-quarter results will be released the third week in April. Other Banks Also Gain; Profits Expected - The preliminary earnings report rallies the stock market, and the S&P 500 caps a fifth consecutive weekly gain and adds 3.8 percent to a two-month high of 856.56, the longest stretch since the bear market began in October 2007. The Dow Jones Industrial Average rises 246.27, to 8,083.38. The largest US lender, Bank of America, gains 35 percent today; JPMorgan 19 percent, and Citigroup 13 percent. The 24-company KBW Bank Index surges 20 percent, its biggest one-day gain since May 1992. Oppenheimer & Co. analyst Chris Kotowski says of these firms, “Barring an act of God, they had better report some number that is in the black or potentially risk being involved in some of the most intense securities litigation on record.” Accounting Rules May Have Helped Profit Statements - Christopher Whalen, a managing director of Risk Analytics, says that the Financial Accounting Standards Board’s relaxation of accounting rules may have helped banks—including Wells Fargo—report a profit. “Most analysts are expecting loss rates to be much, much higher than we have seen in the last 20 to 30 years, even longer,” he says. “Given that, provisions of the large banks are not high enough.” Wells Fargo 'Underperforming?' - While Wells Fargo Chief Financial Officer Howard Atkins says that increasing the bank’s provision for loan losses to $23 billion is adequate compared with other large US banks, FBR Capital Markets analyst Paul Miller wrote in a report that the bank’s addition of a $4.6 billion provision was below his estimate of $6.25 billion. “We remain cautious based on what we don’t know.” Miller rates Wells Fargo shares “underperform” and said that the preliminary report did not contain the percentage of non-performing loans and trends in Wachovia’s option-adjustable rate mortgate portfolio, a percentage Miller deems important. Atkins says that Wells Fargo benefited from strong trading results at Wachovia’s capital markets business, which the bank continues to shrink. He said that the improvement will not reverse those plans. Approximately 75 percent of Wells Fargo’s mortgage applications are refinance. President Obama said that homeowner interest rates, at less than five percent, are the lowest since 1971, and that it was “money in their pocket” for homeowners. Wells Fargo’s biggest shareholder is Berkshire Hathaway Inc., an acquisitions and investments firm owned by Warren Buffett. [Bloomberg, 4/9/2009]

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